Deja Vu, But No Disaster: U.S. Government Hits Debt Ceiling

The United States government is estimated to have hit its debt ceiling of $14.294 trillion today, as Congress continues a stand-off over whether or not to raise the debt limit in advance of the August 2nd deadline. Treasury Secretary Timothy Geithner recently extended the deadline by enacting a policy to stop payments into government pension plans, among other things, until the debt ceiling is raised.

“I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens,” Geithner wrote in a letter to members of Congress today. “I again urge Congress to act to increase the statutory debt limit as soon as possible.”

As Geithner noted in an earlier letter, the U.S. government has never failed to raise the debt limit in a timely fashion. If the government were to do so, according to Geither, it would prompt governmental default and result in, effectively, “a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.”

In that letter, Geithner noted that Treasury Department estimates predicted that the debt ceiling would be reached sometime between March 31st and today, May 16th. Bingo.

The talks in Washington have been embroiled in partisan debates over spending cuts. Prominent Republicans are using the debt limit discussion as an opportunity to debate budget cuts and entitlement reforms.

“There will be no debt limit increase without serious budget reforms and significant spending cuts – cuts that are greater than any increase in the debt limit,” Speaker of the House John Boehner said in a statement.

“The emergency we enter today isn’t about a penny of new spending, countered Senate Majority Leader Harry Reid. "It’s not about new programs or new taxes. It’s not about creating new obligations, only meeting existing ones. The debt limit is about paying what we already owe.”

As financial advisor Barry Ritholtz notes, these sorts of eleventh hour debates are nothing new. He quotes a New York Times article from Ronald Reagan’s presidency in 1983 that sounds perfectly applicable to today: “Although the routine increase in the debt ceiling was essential to meet Government obligations already incurred, the vote is traditionally delayed to the 11th hour, with the minority party accusing the party in power of spendthrift ways.”

Other economists are coming out of the woodwork to argue for an increase in the debt limit. Warren Buffett was quoted as saying, that failure to raise the debt ceiling would be “most asinine,” while his deputy Charlie Munger characterized the Congressional debate as a competition to see “who can be the most stupid.”

I spoke with economist David Malpass a week and a half ago, and he noted that there will likely be negotiated cuts in the 2012 fiscal year budget as part of the debt limit increase, although he saw no real change in material spending trends. “I think they need to stop using the current debt limit, which doesn’t work – it just adds to spending and debt – and instead implement a ceiling on debt that’s enforceable by spending cuts,” Malpass told me.

While today’s news does not come as a particular surprise, it does put the debt limit debate in the spotlight. Geithner and the Treasury await a decision from Congress; until then the U.S. will continue spending on borrowed time.